Nothing can cause stress for a flourishing digital nomad quite like the onset of tax season. You’re out there exploring the world, working remotely from multiple countries or continents, and suddenly it’s time to file your income. (Ugh.)
It can feel overwhelming for sure, which is why we’re here to lend a helping hand! We’ve rounded up all the info you’ll need to know for completing your digital nomad taxes.
But before we begin, please understand this post is targeted toward U.S. citizens, and is not intended as legal advice. Rather, this is meant to serve as a guide, and to provide some helpful resources for your tax journey. We’d still encourage you to seek out professional services if you need additional support as you’re filing.
Do digital nomads have to file taxes?
If you’re an American citizen living outside the United States, you’re definitely responsible for paying taxes to the U.S. government. Simply put, all American citizens are subject to U.S. tax on their worldwide income, no matter where they live.
Reducing your taxes & write-offs
Now that you know you *still* have to file, let’s take a look at how to reduce what taxes you owe!
There are a handful of write-offs and exclusions you may qualify for to help you save big and leave more room in your travel budget.
1. Foreign Earned Income Exclusion
As stated above, if you’re a U.S. citizen who lives abroad, you will be taxed on your worldwide income. However, you may be eligible to exclude your foreign earnings if you fall below the income threshold for 2021. With the Foreign Earned Income Exclusion (FEIE), a digital nomad is allowed to make up to $108,700 for the year without having to pay any U.S. income tax.
In order to qualify for the FEIE, you have to be ‘physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.’ With that said, if you work as an independent contractor, freelancer, solopreneur, and so on, you will owe self-employment tax; the excluded amount from the FEIE will reduce your regular income tax, but will it not reduce your self-employment tax. But, as a self-employed individual, you may be able to claim the foreign housing deduction instead of a foreign housing exclusion.
Note: the FEIE is an incredibly detailed document, which is why it’s not a bad idea to partner with a tax accountant when you’re filing.
2. S corporations
As an entrepreneur, you’ve probably heard about the importance of incorporating, but you might be confused about what type of business entity to choose. One of the most popular entities for small businesses is a Limited Liability Company (LLC). Once you’re an LLC, you can choose between being taxed as a ‘disregarded entity’ (which is like being taxed if you weren’t incorporated), or as an S corporation.
According to the IRS, small business corporations (S corporations) are those that ‘elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.’ S corporations report their income and losses on their personal tax returns, and are assessed at their individual income tax rates; in other words, they avoid double taxation on their corporate income.
If you’re an S corporation, you can potentially lower the self-employment taxes the FEIE doesn’t cover. You have the ability to make distributions to yourself, which are not subject to self-employment tax — but the catch is, you still have to pay yourself a ‘reasonable salary’ (which is taxed).
Note: being taxed as an S corporation will come with some extra administrative costs and complexities, so be sure to do your research or invest in a quality CPA.
3. Digital nomad deductions
One of the easiest (but most underused) ways to cut down on your taxes is to reduce your taxable income through deductions. All too often, freelancers and small business owners overlook qualifying deductions and pay way more than they’re legally required. Any expense you acquire in the name of earning your living can be deductible!
For the majority of digital nomads, this will include:
- Your laptop and computer-related equipment (like laptop bags or accessories).
- Office supplies like notebooks, pens, calendars, and more.
- Monthly membership to a coworking center.
- Your internet service and phone expenses.
- Banking fees incurred while receiving payments (like those with PayPal).
- Educational courses related to your field of work.
- Legal fees or accounting expenses.
- Website hosting and domain fees for your professional site.
4. Prevent potential penalties
There’s no doubt doing your taxes can be a challenge, but if you don't comply with tax regulations, you could be responsible for paying a penalty. A common penalty for self-employed nomads comes from forgetting to file quarterly estimated payments to the IRS. If you’re self-employed, you should be filing (and paying) taxes throughout the year, not just when April rolls around. Unfortunately, failing to do so means you’ll likely owe some form of interest penalty.
Additionally, if you have a bank account outside the United States, you might be required to submit a FATCA and/or a FBAR. Although filing these won’t raise your tax liability, if you don’t comply, there’s a good chance you’ll encounter some severe penalties.
The good news is, U.S. citizens living abroad can qualify for a two-month extension on their federal tax returns. While taxes typically need to be filed by April 15th, there’s an automatic extension until June 15th for Americans residing outside the country. What’s more, there’s a six-month extension available until October 15th, which can be applied for with Form 4868.
Most people miss out on these deductions because they simply don’t know about them, or they did a poor job with recordkeeping (and don’t know what they spent during the year). Using an accounting platform like QuickBooks or similar software can save you a lot of money and a major headache during tax-time, by tracking all of your expenses as you go.
Resources to help you file your taxes
Interactive Tax Assistant
With the help of the IRS’s Interactive Tax Assistant (ITA), you can determine whether income earned abroad can be excluded from income reported on your U.S. federal income tax return.
Form 1040 is used for a U.S. individual income tax return. Personal tax returns need to be filed in all situations, so be sure to save this where you can easily come back to it.
Form 2555 is used in conjunction with foreign earned income. You’ll use this to claim the FEIE, as well as to apply for the foreign housing exclusion or deduction.
FinCEN Form 114
FinCEN Form 114 is used to report foreign bank and financial accounts (FBAR). This document needs to be filed by U.S. citizens with money in foreign accounts totaling more than $10,000.
Form 1116 is used to claim a foreign tax credit if you paid or accrued certain taxes while you were living away from the United States.
The bottom line
While filing your taxes won’t be the most fun you have as a digital nomad, the whole process can be a little easier if you track your expenses, understand your exclusions, or seek counsel from a certified accountant. And keep in mind, the sooner you file, the sooner you can get back to planning your next great escape!
Digital Nomad Taxes FAQs
Do digital nomads pay taxes?
Yes, digital nomads pay taxes! If you’re an American citizen living outside the United States, you’re still responsible for paying taxes to the U.S. government each year.
When do I have to file my taxes as a digital nomad?
While taxes typically need to be filed by April 15th, there’s an automatic extension until June 15th for U.S. citizens living outside the country. In addition, there’s a six-month extension available until October 15th, which can be applied for with Form 4868.
What can I write-off if I’m a digital nomad?
If you’re working as a digital nomad, any expense you acquire in the name of earning your living is deductible. For most people, this will include things like: laptop, office supplies, coworking membership, internet service, banking fees, and the cost to host your professional website.